Brokers reopen doors to FX derivatives as dust settles

Mumbai: Top brokers have reopened the currency derivatives door for clients willing to declare that they comply with rules, after trading volumes plunged following the implementation of recent central bank directions.

Zerodha, Motilal Oswal and Kotak Securities have begun seeking self-declarations from clients stating that such positions are taken only against unhedged exposure within the $100 million limit across all foreign exchange contracts stipulated by the Reserve Bank of India (RBI).

On 5 January, the RBI said while users could take exchange-traded currency derivatives (ETCD) positions in dollar, yen, euro and pound with rupee as the other pair up to $100 million across all recognized exchanges, without having to establish underlying exposure, the exchanges must inform them that they should be able to establish the existence of a valid underlying exposure which has not been hedged. Following this, brokers closed out retail client positions in ETCD to ensure that none fell foul of the Foreign Exchange Management (Foreign Exchange Derivatives Contracts) Regulations, 2000.

The self-declaration for clients of Zerodha, among the largest stock market brokers in India, reads: “Traders acknowledge to have previously engaged in ETCD through Zerodha and intend to continue doing so; to maintain their position limit within $100 million; have underlying exposure which is not hedged in accordance with the RBI directive; upon request by Zerodha, the relevant exchanges (NSE & BSE), or the RBI, provide sufficient evidence of the underlying exposure related to ETCD contracts and furnish the same promptly, if required; and indemnify and hold Zerodha harmless from “any liabilities, losses, damages or costs that may arise in the event the Trader is unable to produce the required evidence….”

Mint has seen a copy of the form, to be signed by traders. In response to queries confirming the existence of the declaration and traders having signed up, a Zerodha spokesperson said, “We would not like to comment. Kindly excuse us.”

Kishore Narne, executive director of Motilal Oswal Financial Services, confirmed that his brokerage too had asked clients to submit a self-declaration on ETCD “as a prima facie check to prevent any misuse.”

“We are asking for their line of business, whether they are hedgers, having forex exposure, whether the exposure is unhedged and whether they are aware of the Fema rules and are not in violation,” he said. “The onus is on the end user and not on the broker for being in conformity with Fema rules.”

Kotak Securities has also mandated a similar self-declaration for clients who want to trade in currency derivatives, an executive at the brokerage said on condition of anonymity.

The RBI circular on ETCD was to take effect on 5 April, but was extended later to 3 May. Since the ETCD segment was dominated by proprietary and retail traders, most of their positions were closed out by that date. Consequently, the average daily currency derivatives volume on NSE plunged 88% to 16,840.46 crore in FY25 from 1.46 trillion. On BSE, it slumped 82% to average daily volumes of 1,780.15 crore in the same period.

“It is unfortunate that the ETCD market got killed completely,” said Jimeet Modi, CEO, SAMCO Securities. “Whatever low level of liquidity is prevailing in the market now will also impact the remaining market participants. With hardly 20% of participation in the market currently, compared to previous six months average, the price discovery will surely be impacted. India is a growing economy and has an ambition to become a developed economy by 2047. To attain this status, it needs to have vibrant ETCD market with adequate depth which helps in strong price discovery.”

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